Market Data: Sources, Selection, and Verification

Chapter: Market Data: Sources, Selection, and Verification

Introduction

Market analysis is the cornerstone of sound real estate valuation and investment decisions. Accurate and reliable market data is essential for understanding current market conditions, forecasting future trends, and ultimately, determining the value of a property. This chapter explores the critical aspects of market data, including identifying relevant sources, applying rigorous selection criteria, and employing effective verification techniques. The goal is to equip you with the knowledge and skills necessary to master the art of data-driven real estate analysis.

1. Market Data Sources: A Comprehensive Overview

The quality of your market analysis is directly proportional to the quality and breadth of your data sources. A robust analysis should draw from a variety of sources to ensure a comprehensive and unbiased view of the market.

1.1. Primary Sources: Direct Market Interaction

Primary data is collected directly from market participants and provides firsthand insights into real estate transactions and market dynamics.

• Market Participants: Interacting directly with buyers, sellers, real estate brokers, developers, and property managers can reveal crucial information not readily available through other sources.
  • Buyers and Sellers: Understanding their motivations, negotiation strategies, and perceptions of value provides invaluable context. However, data can be tainted and suffer from misinterpretation.
  • Example: A buyer might say they purchased a house for $100,000, while the seller claims they sold it for $105,000. The difference could be a $5,000 repair allowance. The true market price, therefore, would be $75,000 if the seller paid the buyer a $25,000 decorating allowance.
  • Real Estate Brokers: Their extensive market knowledge and transaction experience offer a broad understanding of pricing trends, inventory levels, and buyer preferences. Brokers also speak the language of real estate and are aware of contemporary issues that may or may not have affected the sale.
  • Developers: Insights into new construction costs, project pipelines, and target markets provide valuable information about future supply.
• Surveys and Interviews: Conducting targeted surveys and interviews with market participants can yield valuable quantitative and qualitative data on specific aspects of the market.

Practical Application:

• Experiment: Conduct a series of interviews with local real estate brokers to gather information on the most important property features influencing buyer decisions in a specific market segment. Analyze the responses to identify key value drivers and potential biases.

1.2. Secondary Sources: Published Market Information

Secondary data is pre-existing information collected by third-party organizations. These sources offer a wealth of information, but it’s essential to assess their reliability and relevance to your specific market.

• Multiple Listing Services (MLS): Provide comprehensive data on residential and some commercial properties, including listing prices, sales prices, property characteristics, and transaction history.
  • Used for comparative supply and demand data.
• Public Records: Government agencies maintain records of property transactions, ownership, assessments, and taxes, offering valuable data for tracking sales trends and identifying comparable properties.
• Commercial Real Estate Databases: National databases (e.g., CoStar, Real Capital Analytics) provide detailed information on commercial properties, including sales transactions, lease rates, occupancy rates, and property characteristics.

• Government Agencies: Federal, state, and local government agencies collect and publish demographic, economic, and housing data that can be used to analyze market trends and identify potential growth areas.

  • U.S. Census Bureau: Provides detailed demographic data on population, households, income, education, and housing characteristics.
  • Geographic Information Systems (GIS) and TIGER Data: Integrating census and geographical data in a GIS environment shows useful demographic data on properties, neighborhoods, and regions. The TIGER acronym stands for “topographical integrated geographic encoding and referencing,” describing a database that integrates census and geographical data in a GIS environment.

• Real Estate Research Firms: Independent research firms provide market reports, forecasts, and data analytics on specific property types and geographic areas.

• Academic and Industry Publications: Journals, research papers, and industry publications offer in-depth analysis of real estate markets, investment strategies, and valuation methodologies.

Practical Application:

• Experiment: Utilize a combination of MLS data, public records, and commercial real estate databases to compile a comprehensive dataset of sales transactions for similar properties in a specific geographic area. Analyze the data to identify pricing trends, outliers, and key value drivers.

1.3. Internal Data: Your Own Transaction History

If you are involved in repeat transactions, your own records become a valuable data source, providing insights into your past performance and market trends.

• Transaction Records: Maintain detailed records of your past transactions, including acquisition prices, operating expenses, capital improvements, and disposition prices.
• Market Intelligence: Track market trends, competitor activity, and emerging opportunities based on your own observations and interactions with market participants.

2. Data Selection: Establishing Comparability

Selecting comparable data is critical to an accurate analysis of the market.

• Your decisions influence how much data is needed, how far back to go for comparables, which similar property features are required, and which others can be adjusted for.
• Choose comparable transactions in which the deciding factors are as similar as possible.
• Investigate the important property features by interviewing market participants.
• The choices you make in selecting comparable sales or listings are critical to an accurate analysis of the market.
• Every market and market participant will be different.
• Real estate brokers may have biases, but interviewing them gives you an informed opinion of why one property sells for more than another from people who see more transactions than anyone else in the market. Talking to brokers can also lead you to additional data. You can learn about the terms of the sale, the price, and the motivations of buyers and sellers. Brokers also speak the language of real estate and are aware of contemporary issues that may or may not have affected the sale.

3. Data Verification: Ensuring Accuracy and Reliability

Verification is a critical step in the market analysis process to ensure the accuracy and reliability of the data. Appraisers should try to verify any secondary and informal sales data they have collected to ensure that those sales occurred under conditions that match the definition of value used in the appraisal assignment.
* Appraisers most commonly verify data obtained through public record databases by conducting interviews with the relevant market players.
* When verifying data, appraisers seek to ensure that the data is complete and correct and that it conforms to the relevant standards and requirements.
* Appraisers also determine if the sales or rentals used were arm’s-length transactions, if they were affected by any specific conditions, and whether any contingencies or concessions were involved.

3.1. Methods of Verification

• Cross-Referencing: Compare data from multiple sources to identify inconsistencies and potential errors. The true market price, therefore, would be $75,000 if the seller paid the buyer a $25,000 decorating allowance, not $100,000.
• Contacting Market Participants: Verify key transaction details, such as sales price, closing dates, and special conditions, by contacting buyers, sellers, and brokers involved in the transaction.
• Physical Inspection: Conduct site visits to verify property characteristics and assess their impact on value.
• Statistical Analysis: Employ statistical techniques to identify outliers and potential data errors.

3.2. Addressing Common Data Issues

• Incomplete Data: Fill in missing data by consulting alternative sources or making reasonable assumptions based on market knowledge.
• Erroneous Data: Correct errors by verifying information with primary sources and making appropriate adjustments.
• Outdated Data: Prioritize recent data and adjust older data to reflect current market conditions.

Practical Application:

• Experiment: Select a sample of sales transactions from your database and verify the sales prices and property characteristics by contacting the listing and selling brokers involved in the transactions. Quantify the percentage of transactions with discrepancies and analyze the potential impact on valuation accuracy.

4. Data Organization: Effective Strategies

Researching significant❓ amounts of data is almost useless unless a system for organizing that data is available.

• Spreadsheets: Data is arrayed in a spreadsheet similar to the format of modern computer software like Microsoft Excel, Lotus 123, and Quattro Pro. Spreadsheet analysis allows a user to view large quantities of data on a single page and compare data without flipping between pages.
• Adjustment grid: The most commonly used organizational tool is an adjustment grid similar to the grids used in residential appraisal forms.

5. Units of Comparison

When raw data does not seem to be comparable, appraisers often break down sales or lease information into a unit of comparison like the price per square foot of gross building area, the price per acre, the price per front foot, or other units recognized in the market.

Conclusion

Mastering the art of market data sourcing, selection, and verification is essential for unlocking real estate value. By adopting a scientific approach to data analysis, you can develop a deep understanding of market dynamics, make informed❓ investment decisions, and achieve superior valuation accuracy. Remember to continuously refine your data collection and verification techniques to stay ahead in the ever-evolving real estate market.